Liquidating

Liquidators

Any user can participate as a liquidator.

Liquidatable Condition

Liquidating is triggered when the smooth equity (Equity*), derived from the smooth mark price, satisfies the following criteria:

$$\frac{MM}{Equity^*} > 100\%$$

Liquidating Price

The price at which the liquidator takes over the liquidatee's strategy positions:

$$FutureLiquidatingPrice = \begin{cases} FutureSmoothMarkPrice^T_t \cdot (1 - LongFutureShock), Qty > 0 \\[5pt] FutureSmoothMarkPrice^T_t \cdot (1 + ShortFutureShock), Qty < 0 \end{cases}$$

$$CallLiquidatingPrice = \begin{cases} V(FutureSmoothMarkPrice^T_t \cdot (1 - LongFutureShock), IV \cdot (1 - LongIVShock), T, t, K, r, call), Qty > 0 \\[5pt] V(FutureSmoothMarkPrice^T_t \cdot (1 + ShortFutureShock), IV \cdot (1 + ShortIVShock), T, t, K, r, call), Qty < 0 \end{cases}$$

$$PutLiquidatingPrice = \begin{cases} V(FutureSmoothMarkPrice^T_t \cdot (1 + LongFutureShock), IV \cdot (1 - LongIVShock), T, t, K, r, put), Qty > 0 \\[5pt] V(FutureSmoothMarkPrice^T_t \cdot (1 - ShortFutureShock), IV \cdot (1 + ShortIVShock), T, t, K, r, put), Qty < 0 \end{cases}$$

Exit Criteria

• When the price no longer meets the liquidatable conditions and the strategy position of the liquidatee has not yet been taken over by any liquidator, the strategy position exits the liquidatable state and returns to a normal holding state;

• If the strategy position of the liquidatee meets the Auto-Deleveraging (ADL) conditions and the current strategy position has not yet been taken over by any liquidator, the strategy position exits the liquidatable state and enters the ADL state.

Dutch Auction

A Dutch Auction typically starts at a high initial price, which is gradually reduced until a participant accepts the price or it reaches a pre-set minimum.

Dederi introduces a Dutch auction discount mechanism designed to enhance market participation in the liquidating process. Specifically, the initial discount parameter is set at $20\%$. During the first $30$ seconds after the strategy enters into the liquidatable state, corresponding price or implied volatility parameters (e.g., $\text{LongFutureShock}$, $\text{ShortIVShock}$) are adjusted by $20\%$ of the initial value. Thereafter, every additional $15$ seconds, the discount increases by $20\%$ of the initial value, capped at $100\%$.

Example

Cathy holds 5 long positions in ETH-9Feb24 futures. At a certain point, her strategy becomes eligible for liquidating and remains unclaimed for a period of time. At 38s, Kitty decides to take over the position when the current $FutureSmoothMarkPrice$ is $2110.1$. The liquidating price for Kitty is:

$$FutureLiquidatingPrice = 2110.1 \cdot (1 - 0.1 \cdot 0.6) = 1983.5$$

Liquidating Settlement

• Liquidatee: All positions are closed at the liquidating price and marked as "Liquidating";

• Liquidator: acquires the liquidatee's positions at the liquidating price.